New Lease Standard 101: 5 Keys to Successful Adoption of Lease Standards

lease standardsMore than a year has passed since the Financial Accounting Standards Board (FASB) issued the long-awaited Accounting Standard Update (ASU) for leases: ASU No. 2016-02—Leases (Topic 842). Many organizations are still in the dark about how to prepare for the ASU’s new guidance, but time is ticking as the effective dates are approaching rapidly.

Non-public entities are granted an additional year, meaning the standard will take effect for fiscal years beginning after December 15, 2019 (January 1, 2020, for those on a calendar year).  However, the standard will take effect for fiscal years beginning after December 15, 2018, (January 1, 2019, for those on a calendar year) for public entities and certain non-public entities with outstanding bond debt.  For businesses presenting multiple years in the financial statements, periods as early as next year must be accounted for using the new guidance.

Following these steps will substantially ease the pain and greatly reduce the risks that are bound to arise from adopting the new lease standard.

  1. Create a task force.  A group of individuals dedicated to overseeing the preparation for this new standard will be crucial to a successful transition.  This task force should be responsible for creating the action plan, managing each step, ensuring the plan stays on track, and holding those involved accountable.  The task force should meet regularly and communicate how the preparation for the new standard is progressing, identifying potential problem areas as they come up and developing solutions to streamline the leasing process in the future.
  2. Gather the data.  There is no way to understand how much work needs to be done until a full inventory of currently existing contracts is taken.  Therefore, the task force’s first step is to compile and organize the data for all leases in existence.  Some businesses may have a single manual spreadsheet that tracks this information, others may have complex lease-tracking software, and still others unfortunately may have lease agreements spread throughout various departments with no central source of information.  Regardless, compiling data will ensure the task force understands how many leases exist, the dollar value of those leases, and whether they were previously classified as operating or capital.
  3. Assess the impact.  As data is gathered, task force members should familiarize themselves with the actual changes in the new lease standard.  This will ensure the new standard’s impact on currently existing leases is understood.  The impact of the new standard will be twofold—first, on the actual financial statements.  The task force should understand how the new operating leases will appear on, and amortize off, the financial statements and how this could potentially affect debt covenants.  The second impact will be on the actual decision-making process for obtaining leases.  Given the effect on financial statements, management may come to alternative decisions regarding purchasing or leasing a future asset.
  4. Centralize the process.  The key to making appropriate future decisions will be having a centralized process for leasing.  The task force will need to develop appropriate policies and procedures for personnel to follow.  The task force should dictate where lease information will be maintained, what information will be collected, how often lease information will be reviewed (e.g. modifications of lease arrangements), who will make the decision to enter lease agreements, and how this information will be communicated within the business.
  5. Communicate the results.  Once the above steps have been completed, the information obtained, and the new policies and procedures implemented, the importance of adhering to the new lease standard should be communicated throughout the business. Employees across all functions of the operation should understand how the new standard will affect the business.  The stakeholders of your business will also need to know about the effect of the new standard, as the first year of adoption will greatly impact the financial statements.

If your resources are stretched thin, PYA offers project management services related to all of the critical steps discussed above to help ensure a smooth transition to the new lease standard.  If PYA can help with this transition, contact an executive below at (800) 270-9629.


Trevor Brown

Trevor Brown

Manager

Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Doug Arnold

Doug Arnold

Principal

Larry Felts

Larry Felts

Audit and Business Advisory Principal

Related Posts
In response to inquiries from non-profit entities, the American Institute of Certified Public Accountants (AICPA) has provided additional clarity and guidance regarding accounting for unconditional promises to make donations, with...
Read More
temporarily restricted net assets

Attention Non-Profits: AICPA Clarification on Release of Temporarily Restricted Net Assets

An Inside Public Accounting Top 100 Accounting Firm, PYA recently was featured for its successes in the May 2017 edition of Accounting Today.  PYA is among four firms the publication...
Read More
accounting

PYA’s Path Forward Leads to Accounting Today Feature

Death is a sensitive subject – especially as it relates to making decisions before and after the passing of a loved one.  However, proactively creating and organizing end-of-life documents can...
Read More
end-of-life documents

End-of-Life Documents: ‘Til Death Do Us Part

For many, estate planning stops at creating a Last Will and Testament.  However, not many are aware of the struggles their loved ones will face  to gain possession of the...
Read More
estate planning probate

Estate Planning: How to Avoid the Hassles of Probate Court

Another tax deadline has passed, and you may be wondering which records should be kept and for how long!  If you find yourself caught up in post-tax-deadline spring cleaning, try...
Read More
tax records

Spring Cleaning for Taxes: Which Records Should You Keep and for How Long?

The new April 18, 2017, deadline for filing Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, has come and gone. Certain individuals and businesses...
Read More
FBAR

Foreign Bank and Financial Accounts Reporting: Did You Miss the New Deadline?

The Financial Accounting Standards Board (FASB) recently issued a Financial Accounting Standards Update (ASU), Business Combinations (ASU 2017-01), to address concerns that the current definition of a “business” is overly...
Read More
business combinations ASU

Clarifying the Definition of a Business

While it’s a “given” that accuracy in financial statements is important, ensuring such accuracy can be tricky.  When enlisting the aid of a third party to help give your company...
Read More
assurance engagements

Assurance Engagements 101: Are Your Financial Statements Accurate?

March 29, 2017, marked a day that will go down in Guinness World Record history, and PYA (Pershing Yoakley & Associates, P.C.), serving as the official CPA firm, was on...
Read More
accounting

PYA, Al Roker Help Make World Record History

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop